Level 2 — RecallOrder Flow & Tape Reading

Order Flow & Tape Reading

⏱ 30 minutes40 marksprintable — key stays hidden on paper

Level 2 — Recall & Standard Problems

Time Limit: 30 minutes Total Marks: 40

Instructions: Answer all questions. Show working for calculation questions. Use clear definitions where asked.

Q1. Define Level-2 (market depth) data and state two pieces of information it shows that a simple Level-1 quote does not. (4 marks)

Q2. In an order book, distinguish between the bid side and the ask (offer) side. What does the difference between the best bid and best ask represent, and what is it called? (4 marks)

Q3. Given the following top-of-book snapshot for a stock:

Bid Size	Bid Price	Ask Price	Ask Size
500	100.20	100.25	300
800	100.15	100.30	600
400	100.10	100.35	900

(a) State the bid-ask spread. (b) Compute the total displayed bid volume and total displayed ask volume. (c) State whether the book is bid-heavy or ask-heavy. (5 marks)

Q4. Define time and sales (the tape). State two things a tape reader looks for to judge buying vs. selling pressure. (4 marks)

Q5. Define delta in order-flow analysis. If a 5-minute bar has 12,400 contracts traded at the ask (aggressive buys) and 9,800 contracts traded at the bid (aggressive sells), calculate the delta for that bar. (4 marks)

Q6. The following are consecutive bar deltas across a session: $+250,\ -120,\ +400,\ -80,\ +150$ Compute the cumulative delta after each bar and state its final value. (5 marks)

Q7. Explain the difference between absorption and exhaustion in tape/order-flow reading. Give one observable sign of each. (4 marks)

Q8. Define spoofing and layering. State why they are illegal. (3 marks)

Q9. Using volume profile, define the Point of Control (POC). Given the following price-to-volume distribution, identify the POC:

Price	Volume
50.10	1,200
50.20	3,400
50.30	5,100
50.40	2,700
50.50	900

(4 marks)

Q10. Define the Value Area and state what percentage of total volume it conventionally contains. Name its two boundaries. (3 marks)

END OF PAPER

Answer keyMark scheme & solutions

Q1. (4 marks)

Definition (2): Level-2 data (market depth) shows the full order book — multiple levels of resting buy and sell limit orders beyond the best bid/offer, including their prices and sizes.
Two extras (1 each): (i) The depth/size of orders at multiple price levels; (ii) the number of participants/orders stacked away from the inside quote (imbalance between buy and sell interest). Why: Level-1 shows only best bid, best ask, and last trade — it hides supply/demand structure.

Q2. (4 marks)

Bid side (1): Prices/sizes buyers are willing to pay (demand).
Ask side (1): Prices/sizes sellers are willing to accept (supply).
Difference (2): Best ask − best bid = the spread. Why: it is the transaction cost of crossing the market and reflects liquidity.

Q3. (5 marks)

(a) Spread = $100.25 - 100.20 = \mathbf{0.05}$ (1)
(b) Bid volume $= 500+800+400 = \mathbf{1700}$ ; Ask volume $= 300+600+900 = \mathbf{1800}$ (2)
(c) Ask volume (1800) > Bid volume (1700) ⇒ ask-heavy (slightly more displayed supply). (2)

Q4. (4 marks)

Definition (2): Time and sales ("the tape") is a chronological record of every executed trade — timestamp, price, size, and (often) whether it hit the bid or lifted the offer.
Two signals (1 each): (i) Trades executing at/above the ask = aggressive buying; (ii) large block prints and speed/clustering of trades. Why: aggressor side reveals who is initiating.

Q5. (4 marks)

Definition (2): Delta = (volume traded at the ask / aggressive buys) − (volume traded at the bid / aggressive sells).
Calculation (2): $\Delta = 12400 - 9800 = \mathbf{+2600}$ (net buying pressure).

Q6. (5 marks) Cumulative delta = running sum:

After bar 1: $+250$
After bar 2: $250-120 = +130$
After bar 3: $130+400 = +530$
After bar 4: $530-80 = +450$
After bar 5: $450+150 = \mathbf{+600}$

(1 mark per correct running value; final = +600)

Q7. (4 marks)

Absorption (2): Large resting limit orders soak up aggressive market orders without price moving much — a passive party is absorbing pressure. Sign: heavy volume but price stalls at a level.
Exhaustion (2): The aggressive side runs out of participants/momentum after a strong move — buying (or selling) dries up. Sign: shrinking delta / volume at extreme with failure to make new highs/lows.

Q8. (3 marks)

Spoofing (1): Placing large orders with no intent to execute, cancelling them to create a false impression of demand/supply.
Layering (1): Placing multiple spoof orders at several price levels to reinforce the illusion of depth.
Illegal because (1): They manipulate market perception and price — a form of fraud/market manipulation banned by regulators.

Q9. (4 marks)

Definition (2): POC is the price level with the highest traded volume in the volume profile.
Identification (2): Max volume = 5,100 at price 50.30 ⇒ POC = 50.30.

Q10. (3 marks)

Value Area (1): The range of prices where the majority of trading volume occurred.
Percentage (1): Conventionally 70% of total volume.
Boundaries (1): Value Area High (VAH) and Value Area Low (VAL).

[
  {"claim":"Q3 spread and volumes", "code":"spread=100.25-100.20; bid=500+800+400; ask=300+600+900; result=(round(spread,2)==0.05 and bid==1700 and ask==1800 and ask>bid)"},
  {"claim":"Q5 delta = +2600", "code":"delta=12400-9800; result=(delta==2600)"},
  {"claim":"Q6 cumulative delta running and final", "code":"vals=[250,-120,400,-80,150]; cum=[]; s=0\nfor v in vals:\n    s+=v; cum.append(s)\nresult=(cum==[250,130,530,450,600] and cum[-1]==600)"},
  {"claim":"Q9 POC price is 50.30", "code":"prof={50.10:1200,50.20:3400,50.30:5100,50.40:2700,50.50:900}; poc=max(prof,key=prof.get); result=(poc==50.30)"}
]